Hi there and welcome to this board.
From your questions I can gather that you want your cake and eat it

but that ain't going to happen.
We understand that you are new to this and the way you ask your questions shows that you don't know much about the very subject you want to conquer. Don't despair, with a bit of understanding from your end as well as ours, we should get you there.
Having said all that, let me start you off like this:
1. VS does not come with a firewire link. The link is hardware, VS is software. Or did you mean to say that you bought yourself a PCI firewire card and that came bundled with VS?
2. DV-AVI is a lossles compression format which gives you excellent quality, as good as the original on your tape. That's exactly why the file size is about 13 GB per hour of video. If you capture to DVD standard, you are in fact capturing to mpeg2, a lossy compression format that will still give you very good looking video but when you edit this and save it again it will get compressed again, loosing a lot of quality.
3. VOB files are DVD files with mpeg2 compression. The same applies as for point 2
4. In order to capture to mpeg2 format, unless you have an expensive capture device with hardware encoding to mpeg, your "crappy P4" may be strained to keep up with this although you claim to have captured about 30 minutes of a clip doing this. That would indicate that your system may not be as crappy as you think. Please fill in your system details in your profile to enable us to give you some more meaningful advice.
To come to a conclusion here, If you are serious about this, you will need to invest a bit of money to get your system better suited. You need at least one bigger HDD to seriously look at this. With your 40 GB you are pushing a string. How much is actually free on that one?
Don't be shy and come back here if you want to persue this.